How The ACA Works (Explained Simply)

The Affordable Care Act (ACA, Obamacare) addressed many aspects of the healthcare system; one of the main goals of the law is to ensure that all individuals have access to healthcare coverage. Prior to the ACA, individuals in the private market who did not have insurance through an employer had to attempt to purchase health insurance through small-group and non-group insurance markets. Within the small-group and non-group insurance markets, health insurers could deny coverage to individuals if they had preexisting conditions. The reason health insurers would do this is that the expected cost of having a “sick” individual in an insurance plan is much greater than the expected cost of having a “healthy” individual in an insurance plan.

The ACA required health insurers to cover all individuals, regardless of whether an individual had preexisting conditions or not. In isolation, the result of this is that the cost to the health insurer skyrockets because they suddenly have to pay for the healthcare costs of many more “sick” individuals. These increased costs to health insurers would force health insurers to increase premiums. These higher premiums would make it so that “healthy” individuals would be less likely to purchase health insurance (because the expected benefit of having health insurance for these “healthy” individuals would decrease). If “healthy” individuals leave health insurance plans – premiums must increase even more to cover costs – and the vicious cycle continues until having a health insurance industry at all is not a feasible proposition.

The only way to both cover “sick” individuals and keep the health insurance industry sustainable is to require “healthy” individuals to purchase health insurance. “Sick” individuals effectively increase costs to the health insurer, but “healthy” individuals guarantee health insurers a certain level of revenue in order to pay for the increased costs. However, some individuals cannot afford to purchase health insurance; so if an individual is “healthy” and “low-income” – and they are required to purchase health insurance – they face an additional financial burden that they may not be able to afford.

In order to ensure that all “healthy” individuals can afford to purchase health insurance, the ACA gives subsidies to families that it deems cannot afford to purchase health insurance without assistance. When all “healthy” people are required to purchase health insurance and all “healthy” individuals can afford to purchase health insurance, health insurers are able to cover the additional cost that comes with taking care of costlier “sick” individuals.